How Obama Plans to Stop Big College Tuition Hikes

President Obama said in his state of the union speech that it’s time to cut federal aid to any college that does not keep tuition increases in check. The hope is that they will then find ways to cut costs and make college more affordable. Here's how that is likely to play out.

One reason that rising college costs have been unrelenting for decades is the sheer amount of money that the federal government makes available through grants and loans. Why should universities rein in costs? Students keep coming—in part because the federal government keeps shelling out.

That’s not the whole story, of course. States have been slashing funding to universities and the lost revenue has to be made up somewhere. Meanwhile, college tuition increases will probably always rise faster than inflation. Schools hand out so much aid themselves that to raise an additional dollar they must hike tuition by $1.50, says Mark Kantrowitz, publisher of finaid.org. This has the effect of setting a floor for tuition increases about 50% above the rate of inflation.

Still, tuition increases often exceed even that. In his State of the Union speech, President Obama said it’s about time we use cause and effect to reverse this trend. He wants to cut federal aid to any college that does not keep tuition increases in check. The hope is that they will then find ways to cut costs and make college more affordable. From his speech:

“Let me put colleges and universities on notice: If you can’t stop tuition from going up, the funding you get from taxpayers will go down. Higher education can’t be a luxury; it’s an economic imperative that every family in America should be able to afford.”

It’s a great idea, holding down college costs. And Obama says he’s found a way:

“States also need to do their part, by making higher education a higher priority in their budgets. And colleges and universities have to do their part by working to keep costs down. Recently, I spoke with a group of college presidents who’ve done just that. Some schools re-design courses to help students finish more quickly. Some use better technology.”

We need to be careful how far down this cost-cutting road we go because our universities are envied around the world. If threatened by diminishing federal assistance, one response to keep costs down might be to admit more students and overcrowd the classrooms, which would bring in more revenue without a lot of outlay—but perhaps have a real cost on the quality of the education.

So, what might Obama’s plan entail? Kantrowitz believes the primary federal programs—Pell grants and Stafford loans, which account for some $133 billion in aid annually—would go untouched. These are doled out based on individual student applications. When approved, the money can be used at any university. It’s possible to create an ineligible list of universities, based on their tuition increases. But that would be a nightmare to administer, Kantrowitz says.

More likely at risk are the federal funds that colleges receive directly and dole out to students as they see fit. These include funds for work-study programs, Perkins low-interest loans and Federal Supplemental Educational Opportunity Grants, which come to a combined $3 billion. Universities that do not keep a lid on tuition hikes might see these funds dry up, which likely would make it more difficult on the neediest applicants.

Dan Kadlec is a journalist who has written about personal finance for TIME and other outlets for 25 years. He is the author of three books, a leading voice in the global financial literacy movement, and strategic adviser to the National Financial Educators Council.

Kadlec's latest is A New Purpose: Redefining Money, Family, Work,Retirement, and Success